The Securities and Exchange Board of India (SEBI), in the year 1999, had framed "Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999" (hereinafter "existing guidelines") which provides for the stock based incentive schemes to employees. On 28th October, 2014, SEBI has notified Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014, 1 (hereinafter "Regulations") the provisions of which shall be applicable on the following:
- employee stock option schemes;
- employee stock purchase schemes;
- stock appreciation rights schemes;
- general employee benefits schemes; and
- retirement benefit schemes consequent upon which the existing guidelines have been repealed.
The Regulations has been framed by the market regulator SEBI in order to bring into its wide ambit, all the shares related schemes issued by the companies for the benefit of its employees.
As per the Regulation 1 (4), of the Regulations shall be applicable to those companies whose shares are listed on any recognised stock exchange in India, and which fulfills the following:
- has a scheme for direct or indirect benefit of employees;
- involves dealing in or subscribing to or purchasing securities of the company, directly or indirectly; and
- which satisfies, directly or indirectly, any one of the following conditions:
a. the scheme is set up by the company or any other company in its group;
b. the scheme is funded or guaranteed by the company or any other company in its group;
c. the scheme is controlled or managed by the company or any other company in its group.
As far as applicability of these regulations are concerned, Regulation 1(5) provides that these Regulations shall not be applicable to shares issued to employees in compliance with the provisions pertaining to preferential allotment as specified in the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009.
Further, it has been clarified that the provisions pertaining to preferential allotment as specified in the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 shall not be applicable in case of a company issuing new shares in pursuance and compliance of these Regulations.
Certain important definitions
1. Employee (Regulation 2(f )): "Employee" means,
- a permanent employee of the company who has been working in India or outside India; or
- a director of the company, whether a whole time director or not but excluding an independent director; or
- an employee as defined in clauses (a) or (b) of a subsidiary, in India or outside India, or of a holding company of the company or of an associate company but does not include—
(a) an employee who is a promoter or a person belonging to the promoter group; or
(b) a director who either himself or through his relative or through any body corporate, directly or indirectly, holds more than ten percent of the outstanding equity shares of the company.
2. Employee Stock Option Scheme or ESOS (Regulation 2(g)): ESOS means a scheme under which a company grants employee stock option directly or through a trust.
3. Employee Stock Purchase Scheme or ESPS (Regulation 2(h)): ESPS means a scheme under which a company offers shares to employees, as part of public issue or otherwise, or through a trust where the trust may undertake secondary acquisition for the purposes of the scheme.
4. Exercise (Regulation 2(i)): Exercise means making of an application by an employee to the company or to the trust for issue of shares or appreciation in form of cash, as the case may be, against vested options or vested SARs in pursuance of the schemes covered under Part A or Part C of Chapter III of these regulations, as applicable".
5. General Employee Benefits Scheme or GEBS(Regulation 2(l)): GEBS means any scheme of a company framed in accordance with these regulations, dealing in shares of the company or the shares of its listed holding company, for the purpose of employee welfare including healthcare benefits, hospital care or benefits, or benefits in the event of sickness, accident, disability, death or scholarship funds, or such other benefit as specified by such company.
6. Grant (Regulation 2(m)): Grant means the process by which the company issues options, SARs, shares, or any other benefits under any of the schemes.
7. Secondary Acquisition (Regulation 2(zc): Secondary Acquisition means acquisition of existing shares of the company by the trust on the platform of a recognised stock exchange for cash consideration.
8. Share (Regulation 2(zd): Share means equity shares and securities convertible into equity shares and shall include American Depository Receipts (ADRs), Global Depository Receipts (GDRs) or other depository receipts representing underlying equity shares or securities convertible into equity shares.
9. Trust (Regulation 2(zg): Trust means a trust established under the provisions of Indian Trusts Act, 1882 including any statutory modification or re-enactment thereof, for implementing any of the schemes covered by these regulations.
10. Trustee (Regulation 2(zh): Trustee means the trustee of the trust.
11. Vesting (Regulation 2(zi): Vesting means the process by which the employee becomes entitled to receive the benefit of a grant made to him under any of the schemes.
Implementation of schemes
Regulation 3 under Chapter II of the Regulations provides that a Company may implement the scheme either directly or by setting up an irrevocable trust(s). However, where the scheme is to be implemented through a trust the same has to be decided upfront at the time of taking approval of the shareholders for setting up the schemes. Moreover in case the scheme involves secondary acquisition or gift or both, then it is mandatory for the company to implement such scheme through a trust.
The Regulations provides that a single trust can be created for the implementation of the various shares related schemes of the company, provided proper books of accounts, records and documents are prepared for each such scheme.
SEBI shall have the power to specify the minimum provisions to be included in the trust deed and such trust deed along with any modifications, if any, shall be required to be mandatorily filed with the stock exchange in India where the shares of the company are listed.
Trustee and his role
Sub regulation (4) of Regulation 3 prohibits a director, key managerial personnel or promoter of the company or its holding, subsidiary or associate company or any relative of such director, key managerial personnel or promoter from holding the position as a trustee. Further, any person beneficially holding 10% or more of the paid-up share capital of the company shall also be ineligible for holding the position as the trustee of the trust.
A minimum of two trustees shall be required in a trust if individuals or One Person Companies are appointed as trustees. In all other cases, there can only be one trustee.
The trustees shall not have any right to vote in respect of the shares held by such trust. The implementation of the scheme as approved by the special resolution of the members is the task of the trustee. Further, undertaking secondary acquisition as per the scheme is also the task of the trustee.
The trust is strictly prohibited from dealing in derivatives. It shall undertake only delivery based transactions for the purposes of secondary acquisition as permitted by these regulations. However, Secondary acquisition in a financial year by the trust shall not exceed two per cent of the paid up equity capital as at the end of the previous financial year. Further, the trust shall be required to hold the shares acquired through secondary acquisition for a minimum period of six months. However, exception has been granted for the transfer of the shares in exceptional circumstances mentioned therein.
All the disclosures and compliance as applicable to insiders or promoters under the SEBI (Prohibition of Insider Trading) Regulations, 1992 are also applicable to be complied with.
Regulation 4 empowers the compensation committee of the Company to determine the eligible employee for the purpose of this regulation.
Regulation 5 mandatorily requires a company to constitute compensation committee for the purpose of administration and superintendence of the schemes. Such committee shall consist of members of the board of directors of the company as provided under section 178 of the Companies Act, 2013.
The compensation committee shall, formulate the detailed terms and conditions of the schemes and shall frame suitable policies and procedures to ensure that there is no violation of securities laws.
Regulation 6 provides that no scheme shall be offered to employees of a company unless the shareholders of the company approve it by way of passing special resolution in the General Meeting.
Variation in terms of the schemes:
Regulation 7 primarily restricts the company to vary the terms of the schemes in any manner, which may be detrimental to the interests of the employees. However, considering the interests of the employees, the variation in the terms of the scheme can be made only with the approval of the shareholders of the company by way of passing special resolution.
Winding up of the schemes
Regulation 8 provides that in the case of winding up of the schemes, the excess monies or shares remaining with the trust after meeting all the obligations shall be required to be utilised for repayment of loan or by distribution to employees as recommended by the compensation committee, in case of winding up of the schemes.
As per Regulation 9, the transferability of the Option, SAR or any other benefit granted to an employee under the regulations to any person shall be restricted. Moreover the option, SAR, or any other benefit granted to the employee shall not be pledged, hypothecated, mortgaged or otherwise alienated in any manner.
The benefit of the scheme, in case of death of the employee, shall vest in the legal heirs or nominees of the deceased employee.
Certificate from Auditor
The auditors of the Company shall issue a certificate with regards to the scheme that the scheme has been implemented in accordance with the provisions of this regulation and also in accordance with the resolution of the company in the general meeting. Such certificate shall be placed before the members in the Annual General Meeting.
Regulation 15 mandates the company which is implementing any of the share based schemes to follow the requirements of the 'Guidance Note on Accounting for employee share-based Payments' (Guidance Note) or Accounting Standards as prescribed by Institute of Chartered Accountants of India from time to time.
Key Points with regards to some of the Schemes:
Employee Stock Option Scheme (ESOS) - A minimum vesting period of one year is prescriber in case of an ESOS. Further, the company has been given the discretion to determine the lock-in-period for the shares issued pursuant to exercise of option.
In-spite of the employee being eligible for the shares, he shall not be called a shareholder of the company until the shares are issued to him upon exercise of option and consequently, he shall have no right to vote or receive. Further, the amount payable by the employee, if any, at the time of grant of option, may be forfeited by the company if the option is not exercised by the employee within the exercise period.
However, the amount payable by the employee may be refunded if the options are not vested due to non-fulfillment of conditions relating to vesting of option as per the ESOS.
Employee Stock Purchase Scheme (ESPS) - Shares issued under an ESPS shall be locked-in for a minimum period of one year from the date of allotment. If ESPS is part of a public issue and the shares are issued to employees at the same price as in the public issue, the shares issued to employees pursuant to ESPS shall not be subject to any lock-in period.
Stock Appreciation Rights Scheme (SARS) - A minimum vesting period of one year has been prescriber for SAR schemes. Further, no right as to vote or receive dividend or any other benefits of a shareholder is entrusted upon the SAR grantee.
To ensure a smooth transition for complying with the Regulations the companies which have an existing scheme related to the shares of the company, have been provided with a timeframe of one year from the date of the notification in the Official Gazette.
The New Regulations aim to prohibit any unfair practices with regards to secondary acquisition. Further, it is highly improbable that the misuse of the new regulation shall take place, as the act requires the directors of the company to place in the Annual General Meeting a certificate from the auditors of the company, regarding compliance of the Regulations.
* Gopal Bageria is a CS Intern
1. Notification dated 28.10.14, No. LAD-NRO/GN/2014-15/16/1729
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